By Gaurang Somaiya
Rupee ended the week trading in a narrow range ahead of key economic data from the US and upcoming India’s interim Union budget that is scheduled this week. Rupee volatility could remain elevated ahead of the important announcement of the interim Union Budget.
On the domestic front, Forex Reserves fell by $2.79 billion to $616.14Bln in the week ended January 19th. The dollar index in the beginning of the new week came under pressure but during the week better-than-expected economic number kept the greenback supported at lower levels.
The Dollar index hovered near the 103 mark after Fed’s preferred gauge of inflation, core PCE, came in at 2.9%, slightly under the consensus of 3%. Following the core PCE index number was the advance GDP which increased at a 3.3% YoY compared with the consensus forecasts of growth at a 2% rate.
Volatility in major crosses remained subdued amid soft US inflation data. Euro was slightly pressured after the ECB held rates unchanged and comments from the ECB president, wherein she mentioned that the central bank needs to be further along in the disinflationary process suggesting that rate cut process may not start too soon.
Some sources suggest that policymakers know that the time to start discussing a first-rate cut is approaching, provided that inflation and wage data confirm that price growth is already heading to the ECB’s 2% goal this year.
Japanese Yen is hovering in the range of 147 and 149 last week but broadly has been under pressure against the US dollar ahead of the Bank of Japan policy statement. The BoJ held rates unchanged at -0.1% until officials sees more signs that inflation will avoid cooling off more than anticipated.
The central bank also lowered its forecast for core consumer prices for fiscal 2024 to 2.4% from the previous 2.8%. The Chinese Yuan witnessed volatility after the PBoC decided to cut rates by 50bps in a step to infuse more liquidity in the system.
This week, focus will be on nonfarm payrolls number from the US and manufacturing PMI from the US and other major economies. Also, the Federal Reserve and the Bank of England are expected to release their policy decisions.
Expectation is that the Fed could keep rates unchanged at this meeting but the guidance on rates going ahead is likely to provide cues to the dollar. Probability of rate cut for the March meeting has now fallen below 50%, which was above 70% at the start of the year. On the other hand, Bank of England is expected to keep rates unchanged and volatility for the currency could remain confined to a narrow range.
For the week, Dollar Index (DXY) could trade marginally positive and quote in the range of 102.80 and 103.50. As far as the USDINR (Spot) pair is concerned the volatility could elevate post the release of interim Union Budget and the pair could trade sideways and quote in the range of 82.80 and 83.50.
(Gaurang Somaiya, Forex & Bullion Analyst, Motilal Oswal Financial Services. Views expressed are the author’s own. Please consult your financial advisor before investing.)